Canada’s $1.75-billion compensation package for dairy farmers will be based on “hypothetical losses” rather than hard evidence of lost profits due to trade deals, food policy analysts say.

What’s more, the payouts risk exacerbating competitiveness issues in the industry by failing to link compensation to productivity benchmarks.

“We’re setting out $1.75 billion to ‘quote-unquote’ compensate dairy farmers without really having a strategy to understand what the implications are from a trade perspective,” said Sylvain Charlebois, a professor in food distribution and policy, and scientific director of the Agri-Food Analytics Lab at Dalhousie University. “That’s a key thing. We know that market access will increase and it’s likely we’ll need less domestic milk but we don’t know how much. So we’re just writing cheques.”

The package for dairy farmers, unveiled by Agriculture Minister Marie-Claude Bibeau on Friday, is intended to offset lost sales caused by the expanded market access granted to foreign producers under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Those pacts will open up roughly eight per cent of Canada’s highly protected dairy market, where prices have long been kept high by a complex system of supply management involving production quotas, fixed prices and import tariffs and quotas.

Supporters of the system say it is critical to ensure U.S. products don’t flood across the border, threatening food sovereignty and putting Canadian dairy farmers and farms at risk of being pushed out by competition. Critics point out that Canada is the last industrialized country to operate such as system and its dairy industry has failed to keep up with some of the productivity gains and expansions that have taken place in other countries. It also raises prices for consumers, they argue.

A 2014 study by the IFCN Dairy Research Center at the University of Kiel in Germany found the cost of milk production by mid- and large-size farms in Canada was the second-highest in the world after Switzerland.

With that in mind, the government’s compensation dollars would have been better spent if they were tied to clear sustainability and competitiveness goals, Charlebois said.

… if we want to keep (the quota system) we have to make sure it's serving the country well

Sylvain Charlebois, scientific director of the Agri-Food Analytics Lab at Dalhousie University

“I’m not saying we should get rid of our quota system, but if we want to keep it we have to make sure it’s serving the country well,” he said. “Some dairy farmers are doing very well and reinvesting in their farms and becoming more competitive, but others are just drifting and that’s costing a lot of money. If farmers want to stay in the industry they should be made accountable for their productivity or they should be enticed to exit.”

The market access granted under Canada’s latest trade deals represents a direct loss of profits that the government promised to cover, said Murray Sherk, chair of the board for the Dairy Farmers of Ontario.

“Dairy doesn’t like to look to the government for payments; we’d rather have the market share but we’re very pleased with the package,” he added. “And supply management provides a system of predictable pricing that encourages farmers to invest more in their operations, to be more efficient.”

The extra cash flowing into dairy farms comes when they are already overcapitalized — creating a problem for the next generation of farmers, said Al Mussell, research lead at Agri-Food Economic Systems in Guelph, Ont. Indeed, though an ideal return on assets like land and equipment is roughly five per cent, the data suggest Canadian farmers are currently realizing returns of just two to three per cent.

“They’re over-capitalized and drowning in their own capital,” Mussell said. “That might not seem like a problem but it’s sitting there in the land and all these assets. When it’s time to transfer the farm to the next generation, how are they going to afford it?”

The federal cash injection also comes as Canada’s grain farmers are struggling with depressed prices and demand due to the trade wars, he added. Ottawa granted grain farmers hit by direct Chinese trade measures an extra six months to repay cash advances under the Advance Payments Program. The government also strengthened the APP by increasing the maximum loan limit for all farmers to $1 million from $400,000 with additional interest-free loans for canola producers.

“Grain farmers could be in for a long haul of low prices and a sobering trade outlook,” said Mussell. “They look at this and say dairy farmers got $1.75 billion and what did we get? Debt.”

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